A senior US Treasury source said the signing of two major oil deals by US oil giant Chevron after the forced withdrawal of Russian companies from key energy projects in Iraq is a major turning point for the West’s resurgence in the Middle East. OilPrice.com last week. He emphasized: “Iraq is the heart of the Middle East, a major ally of Iran, vital to the interests of Russia and China, and it allows a major American power to be at the center of its economy.” So, what does this mean for Iraq’s energy sector and its geopolitical trajectory?
The first of the two sets of deals, perhaps the most significant, involves the transfer of management of the massive West Qurna 2 oil field (with estimated 13 billion barrels of oil reserves) to Chevron, following the exit of Russia’s No. 2 oil company Lukoil a few weeks ago. The field is one of the largest in the world, accounting for about 10% of Iraq’s total production of about 4 million barrels per day (bpd) and about 0.5% of the world’s oil. The second deal involves the development of Chevron’s largest Nasiriyah oil field (estimated reserves of 4.36 billion barrels), four exploration blocks in Dhi Qar province and the Balad field in Salah al-Din province. The Russian oil giant was forced to withdraw after the US Treasury introduced a new series of sanctions, including not only two corporate companies Lukoil and Rosneft (Russia’s first oil company), which were added to the list of specially designated nationals and blocked persons, but also key individuals associated with the companies. The targeting of Russia’s two leading oil companies was a major step from previous sanctions that included lower-tier firms such as Gazpromneft and Surgutneftigas, which were part of Washington’s gradual ‘toughening’ of Putin. Between them, Lukoil and Rosneft export nearly 3.1 million bpd, which the West considers vital to Russia’s ability to maintain its war funding in the Ukraine conflict.
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The economic consequences for the Kremlin due to the oil shortage (and for China due to the loss of highly discounted barrels from Russia) were the sea change that led to the US-led initiative in Iraq. After the ousting of Saddam Hussein as leader in 2003 and growing discontent among the Iraqi public with the Western military presence, Russia and China increased their influence in Iraq for three main reasons, as fully analyzed in my recent book The New Global Oil Market Order. First of all, this country offers large oil reserves at a low average price of 2-4 dollars per barrel, along with a large amount of associated and non-associated gas. Second, it is located in the geographical heart of the region, west of Iran, north of Saudi Arabia and Kuwait, east of Jordan and Syria (the long Mediterranean coast offers access to other important sea routes) and south of Turkey (allowing access to western Europe). And third, it is a key member of the geopolitical arc of Shiite power that stretches from Iran through Iraq, Syria, and Lebanon, where Shiite communities and pro-Iranian groups have historically had significant influence on regional politics, economics, and security. All these advantages have been reduced for Moscow and Beijing, as Western influence in Iraq has been reasserted.
Following Chevron’s signing of the two contracts, a senior source close to Iraq’s oil ministry confirmed exclusively to OilPrice.com that the government expects the US company to be able to double West Qurna 2 production in a relatively short period of time. This seems clearly achievable for a company of Chevron’s size, scale and capabilities, given that Lukoil was secretly able to produce more oil than the field disclosed to the Iraqi Ministry of Oil, as detailed in my recent book. Specifically, as a source close to Iran’s Ministry of Petroleum exclusively told OilPrice.com in 2017, Lukoil knew at the time that it had the ability to continuously produce at least 635,000 bpd, which it expanded to 650,000 bpd in September and produced more than 2017 in September 2017. Senior engineers assured Lukoil’s top management that the 635,000-bpd production was achieved continuously without any problems. The reason why Lukoil did not disclose this to the Iraqi Ministry of Oil was that it believed that the rate of pay per barrel drilled was too low. It was paid US$1.15 per barrel – the lowest price paid to any international oil company in Iraq at the time – and was paid by $5.50 per barrel to Gazprom Neft in the development of the Badra oil field.
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Making matters worse for Lukoil at this point was that it had already spent at least US$8 billion on the construction of West Qurna 2, and complicating the complaint was the fact that Iraq’s oil ministry still owed about US$6 billion for recovered barrels and other development payments. In August 2017, Iranian sources told OilPrice.com that Lukoil was assured that Iraq’s oil ministry would soon pay the US$6 billion it owed the company and that the higher compensation price per barrel would be reviewed as soon as possible. In addition, the Oil Ministry agreed to extend Lukoil’s contract from 20 to 25 years, thereby reducing the average annual cost to the Russian company. It was also agreed that Lukoil would invest at least US$1.5 billion in West Korna 2 over the next 12 months to bring production closer to a target of 1.2 million bpd from the 400,000-bpd level. Unfortunately for the Russians, in November 2017 Iraq’s oil ministry discovered that Lukoil was involved, after Lukoil threatened to withhold all payments until it began steadily increasing production to the 635,000-bpd level that its production tests showed were complete. In response, and after the withdrawal of several international oil companies from Iraq, Lukoil’s senior management thought it was time to try again to get the Ministry of Oil to honor its previous commitments to increase the per barrel compensation in the West Qurna 2 field. To Russia’s surprise, the oil ministry’s response was that it was fine if Lukoil wanted to leave, but that before it could do so, it would have to pay back the previous investment it had promised in 2017 and again in 2019, because it had not met the time-sensitive oil production targets it had agreed to.
Also beneficial to Chevron’s prospects here, and to Iraq’s goal of achieving an oil production of more than 6 million bpd by 2029, are the synergies that will be available to the US company from other Western companies that are now re-operating across the country. Not the least of these is the Joint Seawater Supply Project (CSSP), which takes seawater from the Persian Gulf and transports it to oil production facilities to increase pressure in key oil reservoirs. In any meaningful period to meet and sustain Iraq’s crude oil production targets, the country would have total water requirements equal to about 2% of the combined average flow of the Tigris and Euphrates rivers, or 6% of their combined flow in the low season. This important project is now being implemented by the French energy giant TotalEnergies as part of its $27 billion quadrilateral program in Iraq. Its first phase is underway offshore near the town of Umm Qasr and is slated to process 5 million barrels of seawater per day and transport it to the main oil fields in southern Iraq. Treated seawater will replace fresh water drawn from the Tigris, Euphrates and Aquifers to maintain pressure in oil wells, freeing up 250,000 cubic meters of fresh water per day for irrigation and local agricultural needs in the water-stressed region.
Only the full completion of this project should allow Iraq to significantly increase oil production, to the original production recommended by the International Energy Agency. In fact, the CSSP is directly referenced in the classified report (d Integrated Energy Strategy) was sent back to Iraqi Prime Minister Nouri al-Maliki in 2012, as fully explored in my recent book The New World Oil Market Order. It showed precisely how Iraq could increase its current oil production to 13 million bpd by 2017 from 3 million bpd in the “high production” scenario. 2025.
By Simon Watkins for Oilprice.com
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